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RoadsideretailinChinaGasolinereachesthehugeChinesemarketthroughafragmentedretailanddistributionnetworkofabout90,000stations,almostallstateowned.Manyarerunmoreassinecuresthanasbusinesses,oftenwithastafffourtofivetimeslargerthantheinternationalnormbutwithlessthanaquarteroftheaveragegasolinethroughputofUSstations.TheChinesegovernment,whichiswellawareoftheproblem,hasresolvednottoallowthecountryenergyinfrastructuretoburdenthewholeeconomy:itisfastderegulatingthesector,whichwillbefullyopeneduptoforeigncompaniesin2004underthecommitmentsattendingthecountrymembershipintheWorldTradeOrganization(WTO).Foreignoilcompanieshavehithertobeenrestrictedtoone-offlocaldealsinspecialeconomiczonesortiedtoinvestmentsintoll-roadconstruction.Althoughthestageshouldthusbesetforcannycorporationstomoveintothemarket,itremainsunclearhowtheywillmakemoney.Competitionisalreadydrivingdownretailmarginsongasoline,whilepricesforthebeststationsiteshavesoaredasChina抯largedomesticoilcompanieshaverushedtobuythem.OilcompaniesintheWestfacingsimilarmarginpressuresknowthatmostgasolinestationsareviableonlyiftheyoffergeneral-retailfacilitiesatleastaslargeasaconveniencestore,inadditiontogasoline.ThisistrueinChinaaswell.Thehighest-volumesitesmightbemadeprofitableontheirfuelrevenuesalone,buttherestneedsubstantialnonfuelrevenuestomakeaprofit.Thestrategicimplicationsareclear.InChinaaselsewhere,thefirstdecisionforanoilcompanyiswhethertoownandoperatesitesormerelytosupplythemwithgasoline.Ifthecompanyoptsforownership,ithasachoice:toadoptaretailstrategyandpursuenonfuelrevenuesfromaportfolioofretailsitesortotargetonlythehighest-volumesites,usingthemtobuildahigh-qualitygasolinebrandthatcanalsobeofferedthroughindependentretailers.Atpresent,theChineseoilmajorsarepursuingneitherstrategy;theyhavesimplyrushedtograbanyavailablesite,wheretheysellasmuchpetroleum-basedproductaspossiblewhileignoringtheretailpotential.Themultinationalshavebeenmorejudiciousinselectingsitesfortheirinitialjointventures,buttheytoohaveneglectedthestrategicchoice.Unlessallofthesecompanies,domesticandinternationalalike,changetack,theirinvestmentsinexpensiveChineserealestatemayunravel.THEMARKETANDSITEECONOMICSChina抯dominantoilcompaniesareSinopec,inthesouthandeast,andPetroChina,whichhasthemorecomprehensiverefineryanddistributionnetworkofthetwo,inthenorthandwest(Exhibit1).Thetwocompaniesaimtocapture,betweenthem,70percentofChina抯gasolinesalesvolumeby2005.SincetheirIPOs,in2000,theyhaveinvestedheavilyinpetroleum-relatedinfrastructureandinbrandbuilding.Havingalreadyraisedtheirshareofsalestomorethan40percentandsecuredmostoftheprimesitesinthebiggestcities,theyareontracktomeetthistarget.Until2004,multinationalcompanieswillbeallowedtoownoutrightonlythe300orsositestheynowpossessthroughlocaldealsstruckbeforegovernmentderegulationofforeigninvestmentinthesector,inthemid-1990s,buttheycanbuilduptheirholdingsthroughjointventureswithChinesecompanies.BP,ExxonMobil,andRoyalDutch/ShellareestablishingjointventureswithPetroChinaandSinopecbycontributingcapitalforthepurchaseofsitesandbysupplyinghigher-marginpremiumfuels;BPandPetroChina,forexample,aimtoboosttheirholdingsto950stationsbyacquiring670stationsfromlocalcompaniesinFujianandGuangdong.Suchjointventuresbindthepartnersonlyinspecificprovincesandhavesofarbeenformedinjust4outof27ofthem.Fortheremainder,theoptionsofbothpartiesarestillopen.The60percentofsalesnotcontrolledbythetwoChineseleadersiscurrentlyheldbyvariousquasi-governmentalentities,includinglocalandprovincialauthoritiesandstate-ownedenterprises.Citygovernments,forexample,havestartedtheirownretailinggroups,oftenbuiltaroundlocalhighway-constructionprojects.Someprivateoperatorsarealsoemerging:forexample,ChinaResourcesEnterprise,aholdingcompanybasedinHongKong,has23stationsandisthinkingaboutopeningmore.Butingeneral,smallercompanies,dauntedbythebiddingpowerofPetroChinaandSinopec,areholdingback.BothofthemajorshopethattheirspendingwillcreateaprofitablestructureforChina抯gasoline-retailingindustryafterthemarketopensupin2004.Internationalexperienceshowsthatgasolineretailingtendstoberelativelyprofitablewhereverthetopthreeparticipantscontrol80percentofthemarket,growthisstrong,andthesupplyofgasolineisshort.Chinashouldmeettheseconditions.PetroChinaandSinopecareconsolidatingthemarketbybuyingouttheirindependentrivalsand,giventheirheadstartoverthemultinationals,shouldsucceedingainingaleadingpositioninthemarket.Growthindemandisforecasttoremainhigh,especiallyforhigh-qualitygasoline.Andalthoughsupplyiscurrentlyinbalancewithdemandatthenationallevel,itrunsshortinthecoastalregions,wherebothdemandandgrowtharegreatest.Retailmarginsaretighteningfast,however.AsinalmosteveryderegulatedChineseindustry,domesticpricecompetitionwillprobablybesevereasthemarketopensup.PetroChinaandSinopecfoughtseveraldamagingpricewarsfrom1997untiltheywererestrainedin1999bystate-imposedpricecontrolsthatarenowbeingremovedintandemwithChina抯entryintotheWTO.Theresumedpricecompetitionwillintensifywhennewforeignanddomesticcompaniesarepermittedtopurchasesitesin2004.Moreover,al